Effort choice in a two-component R&D contest between heterogeneous firms

Abstract This article models R&D competition as a multi-effort asymmetric contest in which two firms invest costly effort to improve two components of product quality. Component quality depends on firms’ effort, competencies, and efficiencies, while overall quality is aggregated using a Cobb–Douglas technology with parameters governing the responsiveness of overall quality to component qualities. Effort costs are convex and separable, and firms’ market shares are determined through a micro-founded contest success function based on relative quality. The framework links optimal multicomponent effort decisions to both firm-specific and technological parameters, enabling comparative statics analysis. The results show that changes in structural parameters affect equilibrium effort in both components by altering competitive strength and competition intensity. Improvements in the weaker firm’s competency or efficiency increase effort by both firms, whereas improvements in the stronger firm in one component reduce effort across components when differences in competitive strength are large.